Sasfin : Forex Daily Market – SA inflation above mid-point of SARB’s

Today’s Talking Point

CPI y/y: Dec

Expected: 5.8%

Prior: 5.5%

Analysis: Headline inflation in South Africa remains buoyed above the mid-point of the SARB’s target range, underpinned by higher administered prices amid elevated commodity prices, particularly fuel and food. Given that these factors remain prevalent, risks to the inflation outlook remain tilted to the upside in the near-term. However, with credit extension to households still very weak, there is limited reason to think inflation pressure could take hold long term. Moreover, in-house indicators such as ETM’s inflation risk index suggest that while inflation could quicken in the near term, consumer prices are expected to moderate in the first half of 2022, partly due to base effects. This, coupled with weak growth prospects could ease the pressure on the SARB to hike rates more aggressively in the coming months.

Rand Update

Sentiment towards the USD has improved or rather, global growth sentiment has deteriorated and a rotation back towards the USD is now evident. Wall St, alongside other stock markets, are retreating again, and US Treasury yields continue to surge higher. Inflation remains a key buzzword internationally, and investors are positioning for central banks and the Fed, in particular, to remove monetary accommodation with conviction. Inflation holds the potential to derail the global economic recovery if it is left unchecked and the disposable income of households is severely crimped.

Add to that, indications from the WHO that Omicron will not be the last variant, and there is plenty of concerning news to detract from overall sentiment. Global Covid cases have surged as much as 20% in just the past week, and even though Omicron has proven to be less virulent, it has still dealt the global economy another hit. Mobility stats show that Omicron’s impact was significant. Whether that is a function of an overreaction from policymakers or the fear factor influencing consumer and business behaviour is less important. The point is that it will detract from the growth dynamic through Q1 2022 at a time when inflation is also taking hold.

The WHO clarified that a variant that spreads as rapidly as Omicron does also generates a higher probability of more variants to follow. Although Omicron appears to generate less severe illness, there is no guarantee that the next variant will do the same. The one positive aspect of Omicron is that it has generated a natural vaccine that covers many bases and will help lessen the ultimate impact of future variants, especially when combined with higher vaccine prevalence.

Bond Update

The two major releases of the session ahead are November retail sales and December CPI, which form key inputs into the SA rates outlook. While inflation…